Climate Change Legislative and Regulatory Trends to Watch in 2009

In 2008 we witnessed a broad systemic failure in the U.S. economy that wiped out $7 trillion in wealth from the stock market. At a minimum, this should be a lesson for every CEO that a new way of evaluating and managing risk is required for true sustainable growth. This presents a unique opportunity for companies to expand their operational framework to include enterprise carbon management and sustainability, both in anticipation of increased regulation and the confluence of billion dollar market drivers that will impact their competitiveness for years to come.

President-elect Barak Obama recently reiterated his commitment for a federal cap-and-trade system to reduce emissions to 1990 levels by 2020, followed by an additional 80% by 2050, and has put together a team that is well-equipped to follow through on his promise. In 2009 companies should expect: (1) a U.S. mandatory GHG reporting proposal for all sectors of the economy; (2) to participate in a spirited debate on cap-and-trade policy with a moderate, but very real chance for successful passage; and (3) the U.S. to vigorously re-engage in international climate negotiations.

Three key climate actions to expect from the new administration

1) Look for a quick release of a draft EPA GHG mandatory reporting rule. The U.S. EPA was directed by Congress in its appropriations to propose a mandatory reporting program by September 2008 for GHG emissions across all sectors of the economy. EPA was given broad discretion to determine appropriate thresholds, frequency of reporting and consider both upstream and downstream sources.

The draft has not been released as of January and companies should expect its release to be among the first climate moves of the new administration in the February timeframe. The rule will require reporting from approximately 15,000 facilities across most industrial sectors of the U.S. economy and it will almost certainly be released by March in order to enable reporting to commence with 2010 data due in 2011.

2) Look for a spirited debate on cap-and-trade with a real chance for successful passage. Successful climate policy will provide certainty around an aggressive national goal to set expectations for a long-term price signal that will drive clean energy investment decisions.

One trend to note will be a strong desire of proponents to avoid the economy vs. environment debate that derailed Lieberman-Warner last year. Two early indications of this will be: (1) a robust discussion around cap-and-trade benefits to the economy in terms of clean energy infrastructure, energy security and the creation of green jobs; and (2) willingness to compromise on the stringency of near-term reduction goals in favor of a gradual ramp-up to an aggressive long-term goal. This will help keep initial costs of the proposal down while industry adjusts to a carbon-constrained economy without sacrificing too much in terms of long-term environmental effectiveness.

There are also other measures which could be incorporated, such as banking and borrowing, to contain costs without compromising the certainty of the overall cap.

There are two ways that a cap-and-trade system could be created. One is the legislative route where all contentious issues are debated and addressed by Congress, such as what sectors are covered? Are allowances granted or auctioned? How many and what types of offsets are allowed?

The other way is the regulatory route where the Administration could decide to issue an endangerment finding under its existing Clean Air Act (CAA) authority. EPA released an exhaustive Advance Notice of Proposed Rulemaking in response to the Supreme Court decision in Massachusetts vs. EPA which describes how GHG regulation would work under the CAA framework and what would be triggered by an endangerment finding.

A third option is a hybrid approach where streamlined legislation is passed directing EPA to use its existing CAA authority (with minor technical modifications to the CAA to provide discretion on threshold triggers) to develop a cap-and-trade proposal.

Expect that the legislative option will be preferred as it allows the best chance for a reasonable long-term framework to be set up with fewer opportunities for court challenges to EPA’s discretionary authority. If early compromise can’t be reached, expect an endangerment finding or streamlined bill to entice the other side back to the table. It will also be worth paying attention to initial proposals from influential industry groups, such as the U.S. Climate Action Partnership, to see on which issues consensus might begin to appear.
3) Be prepared for a re-engagement in international climate negotiations. Although the incoming administration has vowed to engage vigorously in the negotiations, two precursors are necessary for a strong U.S. commitment in Copenhagen.

First, it is clear from the past decade in climate negotiations and experience from the Montreal Protocol that the U.S. will not agree to international targets without a majority consensus on domestic policy in place. If a domestic program is settled by the conference with detailed near-term targets and timetables, expect an agreement. If Congress is still working out the details of domestic legislation it will be very difficult to engage in detailed negotiations beyond an agreement on long-term objectives.

The second major factor is the role of developing countries. One of key breakthroughs in Poznan is that developing countries have begun to express a willingness to take on reduction targets, such as Mexico’s proposal to reduce emissions by 50% in 2050 with a cap-and-trade program for energy intensive sectors beginning in 2012. In a classic chicken-and-egg scenario, many legislators in the U.S. are wary of taking on commitments which might harm competitiveness without major developing countries (read China and India) taking on similar commitments, and major developing countries have been hesitant to take on any commitments which could harm long-term economic growth.

Fortunately, the foundation for a global compromise is beginning to appear as countries are increasingly recognizing that a proactive climate change, clean energy, and environmental policy will drive long-term economic growth.

What can business do to engage and influence?

It is clear that companies with significant greenhouse gas (GHG) management experience, such as those that have worked with voluntary government or environmental NGO programs for a number of years are better positioned to analyze risk, identify market opportunities, and influence legislative proposals based on that practical experience.

Companies need to engage with legislators to indicate how they will be impacted by proposed laws and regulations. This requires a sound understanding of carbon assets and liabilities as well as potential cost and risk based on energy and material flows throughout the value chain.

Forward-looking executives need to position their companies and brands with a strategic operational framework to respond to these emerging regulatory drivers, while remaining agile enough to capitalize on changes in market conditions as energy and commodity prices, technology, and climate policy evolve over the next few years.

Jim Sullivan is a Vice President at Clear Standards, a leading provider of enterprise carbon management and sustainability 2.0 software.